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How to maximize RRSP contribution room
April 18, 2020
3:46 am
cruzinalong
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promise said
Thanks all for your feedback by the way I live in Toronto.

Based on my 120K income from 2019 I will look into planning to contribute amount of $22931 into my RRSP that should bring me up to the second bracket of over $92,825 up to $97,069 37.91%

I currently have maxed out my TFSA, I have $20K within my RRSP already and I also have a healthy saving account just sitting in a high saving account getting heavily taxed by the government as you all know with these saving account given my tax margin. I would like to invest the unregistered money I have in stocks to earn dividends and take advantage of the tax saving feature of dividends instead of saving account I just feel like we are at all time high in the stock market and I don't know if this a good time to get in the stock market so I been waiting on the side line.

My follow up question I have is since I would like to get your all take on since I am paying very low for rent given our current in environment in the real estate market being so high i know it's hard to time the market but would you say this is a good time to buy a place now or do you see any correction in the market in the next new few years which I don't mind waiting but I know the waiting in the past made me loose out on huge real estate gain people got.  

I believe renting is better than buying if the rent is low compared the cost of home ownership. I finally bought when my down payment was large enough to create a small mortgage. I have a friend that saved longer and paid cash for his place. Different strokes for different folks.

April 18, 2020
5:37 am
Kidd
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Promise.

I haven't read all the other responses but some of us have different views on a rrsp. You must understand, you are not avoiding tax, you're deferring it. So will the tax rates be lower for you in the future?

I started my RRSP 30 plus years ago and in my case it was the worst investment choice I've ever made. I have a pension, investment income and i started cashing out my RIF at around the age of 52. Over my working years my income more than tripled. So the rrsp tax savings i had back in the 80s is nothing compared to tax i pay on my rif now. I'm paying more now than i saved back then.

Definitely do a tfsa. And try to save the money you would have put into a rrsp.

April 18, 2020
5:58 am
Kidd
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Added to my above reply.

I started cashing out my rif at 52, to spread the withdrawals out as far as possible, in an attempt to minimize the tax hit.

An Rrsp can also be an estate nightmare. If your rrsp is full and both you and your spouse are dead. The kids pay up to 52% cashing the rrsp out.

One last income tax will be done. ALL rrsp money becomes sudden income, the tax rate in 52% on that over $200,000 ish. The tax rate is tiered, so it's not 52% on all the money.

I know i didn't save anywhere near 52% when i put my money into an rrsp.

Here's the tax link for ontario. $220,000 tax rate 53.53%

https://www.taxtips.ca/taxrates/on.htm

April 18, 2020
7:56 am
Kidd
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Sorry i must add more.

Most people invest very badly inside their rrsp's... buying blue chip dividend paying stocks. Dividends offer a tax savings outside an rrsp that are not realized inside an rrsp.

PLUS if the banks and governments encourage the purchase rrsp's... there isn't a more untrustworthy source i would listen to.

April 18, 2020
7:56 am
suburbs4life
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Kidd- these are great and accurate points to share but I don’t think the average person on this board or society is going to be making 220k in their retirement years. The whole point of the rrsp as you stated is to pay into it if you expect to be in a lower tax bracket in retirement. I am way too young to fully grasp the nuances of retirement planning so correct me if I am wrong. However, I have started to think about it now that I am working. I am sure if someone was maxing out their rrsp contributions based on a 150 k salary over 3O years they could be in this situation. However, they shouldn’t just be in RRSPs anyway If that’s their situation. As I’ve been told.

April 18, 2020
7:59 am
suburbs4life
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So what do you suggesting putting into RRSP’s - US listed equities and GIC’s? that’s what I figure I will do.

April 18, 2020
8:23 am
Kidd
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suburbs4life said
So what do you suggesting putting into RRSP’s - US listed equities and GIC’s? that’s what I figure I will do.  

I went looking for a professional answer. I think this is it.

https://www.theglobeandmail.com/globe-investor/personal-finance/should-i-keep-my-dividend-stocks-in-an-rrsp/article536065/

April 18, 2020
9:32 am
Bill
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I agree with Kidd's very useful summary, in much the same situation myself. Plus now there are TFSAs, options not available until recently so not part of now-seniors previous planning.

The key thing is you understand how RRSPs work, try to guess at what your retirement income will be assuming (assume you're at retirement age and it's now, that might help), and see if the tax deduction, plus the value of having that deduction available to you now, is worth the extra taxes later. It all depends on your situation, e.g. a gig economy worker is not at all comparable to a job-for-life-with-nice-pension unionized public sector worker.

I know one person who is making good money, not contributing so is building contribution room, and plans to fill it up to max when he quits because he's going to have large capital gains that year due to having to cash in his company shares. That's the plan, predicting the future is just a guess anyway, but that's his strategy for his particular situation. If you know how RRSPs work, that they have benefits and downsides depending on your situation, you can increase your odds of guessing right.

cruzinalong, renting cannot just be compared to the current cost of home ownership, I think a lot of people buy because they think prices will continue to rise until they can no longer afford to buy so they buy now as insurance.

April 18, 2020
12:41 pm
Londonguy
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Bill said
I know one person who is making good money, not contributing so is building contribution room, and plans to fill it up to max when he quits because he's going to have large capital gains that year due to having to cash in his company shares. That's the plan, predicting the future is just a guess anyway, but that's his strategy for his particular situation.

Just a caveat for your friend -- having a lot of contribution room available to offset a large capital gain will certainly help his situation, but only up to a point. If we're talking about cashing out for a lot of money, then the Alternative Minimum Tax rules will kick in and limit the amount he can shelter in that particular year.

I used to be a big CEE investor using flow-through shares and had to frequently dance around the AMT when taking my write-offs, so I know of which I speak.

You can read up on all the gory details at your leisure, but the impact is that the AMT will require him to fund (pay) the tax payable on the excess (unshelterable) amount for that taxation year, until he can recover it in following years if as and when his income drops back to "normal" levels. So at a minimum he will need to be prepared to pony up a good chunk of tax in the year of disposal without being able to get that money back until the following tax year, or maybe longer depending on his taxable income situation at the time.

He may also want to talk to a tax pro to see if he can't find a better way to stage his exit

April 18, 2020
1:24 pm
suburbs4life
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Kidd said

I went looking for a professional answer. I think this is it.

https://www.theglobeandmail.com/globe-investor/personal-finance/should-i-keep-my-dividend-stocks-in-an-rrsp/article536065/  

Good reassurance there. Thanks Kidd.

April 18, 2020
1:53 pm
Norman1
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suburbs4life said
…The whole point of the rrsp as you stated is to pay into it if you expect to be in a lower tax bracket in retirement. …

One contributes to an RRSP if one expects to be in a similar tax bracket, plus any clawbacks, on average, or lower later as when one deducted the contributions.

If one ends up paying the same tax rate on the withdrawals, then the RRSP is equivalent to a TFSA. Detailed calculations are in this previous discussion.

The RRSP can still be better if one pays a slightly higher rate on the withdrawals.

In one case, $400,000 of contributions, deducted at 32½% average, with the $1.3 million of withdrawals taxed at an average of 40%, results in paying just 16.05% in taxes on the gain of $900,000. That would be the case outside the RRSP had the gains been capital gains.

April 18, 2020
2:08 pm
Bill
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Londonguy, I don't think AMT will apply as there's no tax shelter, flow-through, deferral, etc stuff going on, as far as I know he just loads up on company shares every year as they are made available to him at FMV and he expects a large capital gain when he is forced to sell them back upon quitting. He also has a close relative who's a tax lawyer residenced in a tax haven so I imagine he'll run it by that person, probably already has. I know he's also mused about becoming a non-resident for that year, so maybe that RRSP plan he mentioned to me once will be superceded by another approach, I'm not really privy to his whole situation & latest thinking. But, for sure, thanks for the heads up, I'll pass it on to him.

April 18, 2020
2:51 pm
Londonguy
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Bill said
Londonguy, I don't think AMT will apply as there's no tax shelter, flow-through, deferral, etc stuff going on, as far as I know he just loads up on company shares every year as they are made available to him at FMV and he expects a large capital gain when he is forced to sell them back upon quitting. He also has a close relative who's a tax lawyer residenced in a tax haven so I imagine he'll run it by that person, probably already has. I know he's also mused about becoming a non-resident for that year, so maybe that RRSP plan he mentioned to me once will be superceded by another approach, I'm not really privy to his whole situation & latest thinking. But, for sure, thanks for the heads up, I'll pass it on to him.  

Just for the record, use of an exotic tax shelter doesn't have to be involved. Plain vanilla capital gains exemptions are also considered to be de facto shelter mechanisms (since you are supposedly "getting a break" by not paying tax on 100% of your gain).

Anyways, it sounds like he's getting professional advice so I'll assume he's planning this with his eyes open, which was my only motive in mentioning it.

The discussion in the attached link is directed mostly at farmers, but the COVID-19 housebound or anybody simply curious about AMT can get some basics here -- https://www.bakertilly.ca/en/btc/publications/the-evils-of-alternative-minimum-tax

April 18, 2020
4:14 pm
Norman1
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Alternative Minimum Tax (AMT) paid is recoverable in the subsequent seven years. It can be credited towards one's regular income tax to the extent the regular income tax is above the alternative minimum tax of that year.

For one-time events, the resulting AMT can be more of a prepayment of taxes than an extra tax.

April 18, 2020
4:47 pm
Bill
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Thanks, Norman1, sounds like some features of withholding "tax".

April 18, 2020
5:56 pm
cruzinalong
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Kidd said
Promise.

I haven't read all the other responses but some of us have different views on a rrsp. You must understand, you are not avoiding tax, you're deferring it. So will the tax rates be lower for you in the future?

I started my RRSP 30 plus years ago and in my case it was the worst investment choice I've ever made. I have a pension, investment income and i started cashing out my RIF at around the age of 52. Over my working years my income more than tripled. So the rrsp tax savings i had back in the 80s is nothing compared to tax i pay on my rif now. I'm paying more now than i saved back then.

30 years ago the options were different. I also started an RRSP at a young age. I started withdrawing from RRSP at age 54. I belonged to company pension plan(s) where I worked. I worked for several employers. Because I had a company pension I did not know that I did not need much in an RRSP. I have a friend that contributed to RRSP. I met him about 15 years ago. He started withdrawing from RRIF at age 72. He says he pays plenty of tax. Life is a learning experience. Every day.

Definitely do a tfsa. And try to save the money you would have put into a rrsp.  

April 18, 2020
6:08 pm
cruzinalong
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Bill said
I agree with Kidd's very useful summary, in much the same situation myself. Plus now there are TFSAs, options not available until recently so not part of now-seniors previous planning.

The key thing is you understand how RRSPs work, try to guess at what your retirement income will be assuming (assume you're at retirement age and it's now, that might help), and see if the tax deduction, plus the value of having that deduction available to you now, is worth the extra taxes later. It all depends on your situation, e.g. a gig economy worker is not at all comparable to a job-for-life-with-nice-pension unionized public sector worker.

I know one person who is making good money, not contributing so is building contribution room, and plans to fill it up to max when he quits because he's going to have large capital gains that year due to having to cash in his company shares. That's the plan, predicting the future is just a guess anyway, but that's his strategy for his particular situation. If you know how RRSPs work, that they have benefits and downsides depending on your situation, you can increase your odds of guessing right.

cruzinalong, renting cannot just be compared to the current cost of home ownership, I think a lot of people buy because they think prices will continue to rise until they can no longer afford to buy so they buy now as insurance.  

Yes I can agree with you somewhat. My friend waited until he could pay cash. He said he bought with cash before he could not afford to buy. He is doing fine today even though he purchased at a much older age than I.

April 18, 2020
6:25 pm
cruzinalong
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cruzinalong said

Yes I can agree with you somewhat. My friend waited until he could pay cash. He said he bought with cash before he could not afford to buy. He is doing fine today even though he purchased at a much older age than I.  

Norman1 said

suburbs4life said
…The whole point of the rrsp as you stated is to pay into it if you expect to be in a lower tax bracket in retirement. …

One contributes to an RRSP if one expects to be in a similar tax bracket, plus any clawbacks, on average, or lower later as when one deducted the contributions.

If one ends up paying the same tax rate on the withdrawals, then the RRSP is equivalent to a TFSA. Detailed calculations are in this previous discussion.

The RRSP can still be better if one pays a slightly higher rate on the withdrawals.

In one case, $400,000 of contributions, deducted at 32½% average, with the $1.3 million of withdrawals taxed at an average of 40%, results in paying just 16.05% in taxes on the gain of $900,000. That would be the case outside the RRSP had the gains been capital gains.  

I started an RRSP because of the nice tax break. I have several friends that say the same. We never discussed investments back then. It is a private matter. What if your friends do not have enough free money to make investments? I still think it is unique for each individual. If you are in the low income level NOW have non-sheltered interest, dividends and capital gains are valid possibilities. You can contribute your investment income to TFSA or RRSP.

April 18, 2020
8:04 pm
Norman1
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cruzinalong said
… What if your friends do not have enough free money to make investments? I still think it is unique for each individual. If you are in the low income level NOW have non-sheltered interest, dividends and capital gains are valid possibilities. You can contribute your investment income to TFSA or RRSP.

One needs to careful with the RRSP if one is in a low income bracket now and will also be low enough in income when retired to qualify for the GIS pension.

The clawback on GIS will be 50¢ for each $1 of additional income. That will be like an additional 50% tax on any RRSP withdrawals then!

Such people will need to drain their RRSP's before they start collecting their GIS pension.

April 18, 2020
8:17 pm
Norman1
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Bill said
Thanks, Norman1, sounds like some features of withholding "tax".

It is a minimum tax intended to ensure people pay (1) 15% of their adjusted taxable income above $40,000 or (2) the regular income tax on their taxable income, whichever is higher.

I ask the tax software to generate form T691 each year to see how much my AMT is. It is hard for AMT to be an issue if one is paying significantly more than 15% of income in federal income taxes.

RBC Wealth newsletter The Navigator: Alternative Minimum Tax (AMT) mentions that one could just not use one's RRSP deduction in a subsequent year to recover some AMT paid and save the RRSP deduction for a later year.

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